Never has the prime residential property market been more in the spotlight in the run up to and wake of a Budget than in March 2012.  

The focus was first turned on prime housing by the Liberal Democrat proposals for a mansion tax, championed by Vince Cable. The proposals were justified on the premise that taxing wealth in the form of immoveable property was more efficient than taxing moveable income, that it would affect only the very wealthy and that, in light of council tax receipts, such property made an unfairly modest contribution to tax receipts.

Our work with the Centre for Policy Studies showed that not only would such a tax be complicated and costly to administer given the nuances of valuation, but would also unfairly penalise asset rich, income poor owners who had seen dramatic growth in the value of their homes over their period of ownership. Valuers would have had a feeding frenzy, whilst once but no longer affluent pensioners could have been really squeezed.

Perhaps more pertinent to the wider debate is the extent to which high value property already contributes to the tax take. Our analysis of HMRC data suggests that even before the 5% stamp duty rate was introduced in April 2011 for properties over £1 million, such sales were already delivering 26% of the stamp duty take, but accounting for just 1.6% of recorded sales. Also, over one third of all inheritance tax (IHT) receipts from residential property came from less than 1% of the housing stock held at death.

The red box shocks

Of these two taxes stamp duty has been successive governments’ weapon of choice for the direct taxation of property, and no surprise that stamp duty was reviewed in the Budget rather than introducing a new more controversial tax.

Stamp duty rates for higher value properties have been repeatedly increased since 1997. As a result, tax receipts from housing rose by 670% in the 10 years to 2007/08, while house prices increased by just 180%.

Since then stamp duty receipts have fallen as constrained access to mortgage finance and weak buyer sentiment have led to greatly reduced housing transactions, but more robust sales volumes in the prime markets, particularly in London, and higher rates of duty for these properties, have mitigated these falls.

So, while tinkering with stamp duty for first time buyers has had little impact on Treasury receipts, an additional 1% stamp duty on sales over £1 million since April 2011 has added an estimated £290 million to the £1.2 billion of receipts from top end sales.

Anti-avoidance

The fly in the ointment for the Treasury was that the higher the tax the greater the incentive to seek to avoid tax.  

As mansion tax proposals lost favour so attention turned
to stamp duty avoidance, and in particular the use of offshore corporate ownership.

Our pre Budget analysis suggested the extent of stamp duty avoidance, however undesirable, had been overstated. We expected associated loopholes to be closed in the Budget, but we didn’t expect the chancellor to tackle the issue with such gusto.

Raising stamp duty for properties worth over £2 million from
5% to 7% was perhaps predictable, as was the closure of some specific loopholes.

Equally, given a purchase of shares in a property holding company would be difficult to tax, a 15% charge on transferring that property into a company in the first place is logical.

But it didn’t stop there. A proposed annual levy on corporate ownership of £2 million+ property might best be described as retroactive, targeting owners who had sought to avoid stamp duty prior to the Budget.

The impact

Together the measures are likely to significantly curtail the acquisition of property through special purpose vehicles, though it remains to be seen whether property already owned in this way will be switched into personal ownership.

In their current format the proposals will also impact
established corporate and institutional investors with high-value residential holdings.

Undoubtedly, this was an unintended consequence and corporate and institutional investors caught by the new stamp duty banding, and at risk of being caught by the annual levy, will almost certainly seek exemption from these provisions.

The effect on the market remains to be seen, but these measures could present something of challenge to a smooth recovery in the prime central London markets.

Our view, supported by early evidence in the market, is that they will not undermine market demand or bring a significant amount of new stock to the market to the extent that sudden price falls are triggered.

It is common for the prime central London markets to go through lulls at this stage of a market cycle however, and we believe that these measures are likely to be a catalyst for a period of relatively static prices, in line with our existing published forecasts.  

Beyond central London, where tax avoidance planning was much less common, the effect will be lessened. There is also a distinct possibility we will see growing demand from Londoners wishing to avoid the £2 million price point, making trading out to a larger £1 million+ house an increasingly attractive option.

Taken from
Residential Property Focus 2012 Q2